Coronavirus Impact, Market/Macro Overview & Key Lessons in Investing
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Coronavirus Impact, Market/Macro Overview & Key Lessons in Investing
Coronavirus & Impact on India 2
Although Hubei province in China accounts for only 1.3% of total exports of China, stalled
manufacturing in other regions causes crash in manufacturing activity & auto sales
Exports of top 5 Provinces of China • China accounts for ~12-13% of global trade
• China is the second largest economy in the world. Accounts for
~16% of global GDP. So a large slowdown in China could impact
global growth as well. It remains to be seen if any material impact on
China’s growth is seen beyond Q1 CY2020.
Source: Kotak Institutional Equities
• Hubei, which has most of the confirmed Coronavirus cases in
China, contributes only 1.3% of China’s exports
• Top 5 regions/provinces, which constitute ~ 72% of China’s
exports, account for a marginal percentage of cases in China so far.
• However, supply disruption expected in other provinces a well due
to stalled manufacturing / production in several regions.
• China Manufacturing PMI crashed to 35.7 in Feb 2020 from 50 in
the previous month, making it the largest decline since the 2008
global financial crisis.
• Auto sales in China also fell by a record 80%YoY in the month of
Feb 2020, compared to a 21.6%YoY fall in the previous month.
Source: Bloomberg
3
Wuhan (capital of Hubei) is critical for transportation within China
Wuhan is one of the largest intermediate ports along China’s Yangtze
River with ships connecting the city to Shanghai and Chongqing.
Wuhan is an important transport link between the four cardinal points
of China. Wuhan is a few hours by train to most of China’s important
cities, which makes it a major hub in China’s high-speed passenger
train network
4
Imports from China account for ~14% of total India imports in FYTD20
IN Million USD
Commodity FY19 FY20(Apr-Dec)
Total Imports 5,14,078 3,61,915 • In 9mFY20, India imported ~ $52 bln
Total CHINA imports 70,333 % Share 51,926 % Share of goods from China, constituting
ELECTRICAL MACHINERY AND EQUIPMENT, SOUND RECORDERS AND REPRODUCERS, TELEVISION 20,628 29% 15,397 30%
NUCLEAR REACTORS, BOILERS, MACHINERY AND MECHANICAL APPLIANCES; PARTS THEREOF. 13,384 19% 10,477 20% 14.3% of total imports.
ORGANIC CHEMICALS 8,596 12% 6,244 12%
PLASTIC AND ARTICLES THEREOF. 2,723 4% 2,136 4%
FERTILISERS. 2,053 3% 1,634 3% • ~75% of imports from China are in
ARTICLES OF IRON OR STEEL 1,735 2% 1,277 2% sectors like electronics, electrical
OPTICAL, PHOTOGRAPHIC CINEMATOGRAPHIC MEASURING, CHECKING PRECISION, MEDICAL OR SURGICAL INST 1,588 2% 1,047 2%
VEHICLES OTHER THAN RAILWAY OR TRAMWAY ROLLING STOCK, AND PARTS AND ACCESSORIES THEREOF. 1,521 2% 947 2% goods, chemicals, fertilizers, plastics
IRON AND STEEL 1,422 2% 937 2%
and metals.
MISCELLANEOUS CHEMICAL PRODUCTS. 1,291 2% 986 2%
ALUMINIUM AND ARTICLES THEREOF. 1,175 2% 755 1%
INORGANIC CHEMICALS; ORGANIC OR INORGANIC COMPOUNDS OF PRECIOUS METALS 1,050 1% 603 1%
MINERAL FUELS, MINERAL OILS AND PRODUCTS OF THEIR DISTILLATION 1,047 1% 343 1%
• There are some concerns of supply
FURNITURE; BEDDING, MATTRESSES, MATTRESS SUPPORTS LAMPS AND LIGHTING FITTINGS 988 1% 709 1% chain disruption in the above
GLASS AND GLASSWARE. 618 1% 473 1%
OTHERS 10,515 15% 7,960 15% mentioned sectors.
Source: Dept. of commerce , Gov. of India
5
Exports to China contributed ~4% of total India exports in FYTD20
IN Million USD
Commodity FY19 FY20(Apr-Dec)
Total exports from India to China 16,752 % Share 13,057 % Share • In 9mFY20, India exported ~ $13 bln of
Organic chemicals 3,249 19% 2,231 17% goods to China. This constituted 3.6% of
Mineral fuels, mineral oils and products of their distillation 2,856 17% 1,739 13%
Ores, slag and ash 1,220 7% 1,734 13% total Indian exports
Fish and crustaceans, molluscs and other aquatic invertabrates 721 4% 1,171 9%
Plastic and articles thereof 1,105 7% 703 5%
Electrical machinery and equipment and parts thereof 580 3% 655 5% • ~70% of exports to China are
Nuclear reactors, boilers, machinery and mechanical appliances 831 5% 626 5% concentrated in sectors like chemicals,
Cotton 1,787 11% 489 4%
petroleum products, ores, fish, plastics,
Salt, sulphur, earths and stone 681 4% 460 4%
Iron and steel 319 2% 452 3% electrical machinery, cotton etc.
Coffee, tea, mate and spices 169 1% 355 3%
Animal or vegetable fats and oils and their cleavage products 396 2% 301 2%
Tanning or dyeing extracts 525 3% 249 2%
Copper and articles thereof 244 1% 203 2%
Prepared feathers and articles made of feathers, artificial flowers, etc. 138 1% 146 1%
Others 1,932 12% 1,545 12%
Source: Dept. of commerce , Gov. of India
6Coronavirus impact on Indian sectors is mixed
Sector Impact
Oil and Gas Positive
FMCG Positive
Paints Positive
Textile Positive
Chemicals (Exporters) Positive
Chemicals (Importers) Negative
Automobile Negative
Consumer Durables Negative
Pharma Mixed
Airlines Negative
Hotels Negative
Metals Negative
7Market & Macro Overview 8
Global factors impacting markets
China accounts for ~16% of global GDP
Coronavirus is more contagious, but mortality China accounts for ~12-13% of World Trade
rate is lower (compared to earlier epidemics) Coronavirus Epidemic
Largely contained within China so far, but ex- impact on growth & trade
China cases starting to escalate. (esp. for China)
Risk-off sentiment There could be further loosening
of monetary policy by major
central banks. US Fed did an
Sharp fall in global bond emergency rate cut of 50 bps &
De-escalation of US China yields due to risk- other central banks also starting
Trade War aversion. US bond yields to ease
at record low.
Crude prices had risen sharply in early Jan
2020 due to US-Iran geopolitical tensions,
Some uncertainty on global but have now fallen sharply due to
Global growth slowdown Geo-political & other events Coronavirus concerns
growth has arisen lately, due to seen in 2019, but some (like Coronavirus) & their
the Coronavirus epidemic recovery expected in impact on commodity prices
(developing situation) 2020/2021 & risk appetite
9A synchronized slowdown seen in global growth in 2019, but some recovery expected in 2020/2021
(although some uncertainty persists due to Coronavirus impact)
IMF GDP growth forecast (in %) • IMF cut growth forecasts across advanced and emerging economies.
Global growth slowed down from 3.6% in 2018 to 2.9% in 2019, but
projected to recover in 2020/2021
• This is primarily due to growth slowdown in advanced economies
(esp. US & Euro Area).
• Emerging economies growth also forecasted to slowdown to 3.7% in
2019 from 4.5% in 2018, but recover in 2020/2021.
• India’s GDP growth forecast for FY20 downgraded to 4.8%, but some
recovery expected in FY21/22.
RBI/CSO also downgraded India’s GDP growth forecast for FY20 to 5%.
RBI forecasts GDP growth to recover to 6% in FY21
• China’s GDP growth forecasted to slow down from 6.6% in 2018, to
6.1% in 2019, with further slowdown projected in 2020/2021.
Recent coronavirus outbreak may further impact China’s growth and
trade in the short term in 2020.
Impact on global growth to be seen, if the outbreak spreads to other
Source: IMF WEO Report, Jan 2020. For India, fiscal year ended March is considered, so 2019 = countries on a large scale (still a developing situation, so some
FY20 and 2020 = FY21. For other countries it is calendar year. uncertainty/risk persists)
10India’s global GDP ranking has been rising over the years, is now $2.9 trln economy
GDP at current prices (USD in Billion) – 2005 GDP at current prices (USD in Billion) – 2019 (F)
India has significantly
improved its GDP
ranking over the years.
In 2019, India surpassed
France & UK to become
the fifth largest
economy in the world
11 Source: IMF, KnoemaGDP growth has slowed down; Industrial production lackluster
India Quarterly GDP Growth trend (%, YoY)
• Q3 FY20 GDP growth slowed down to a ~7-year low of
4.7% YoY. Large revisions seen in historical data.
Slowdown was led by Investments (Gross Fixed
Capital Formation), which is in sharp contraction
for past 2 quarters.
Private consumption (~55% weight of GDP) growth
improved to 5.9% from 5.6% in the previous
quarter, but down from 7.0% a year back.
Government spending growth was healthy at
11.8%, vs 13.2% in the previous quarter.
• RBI expects GDP growth to recover from 5% in FY20 to
6% in FY21.
• Index of Industrial Production (IIP) has been
lackluster and volatile, primarily due to slowdown in
manufacturing sector (weight of ~78% in IIP).
• For FYTD20 (up to December), IIP growth was
significantly lower at 0.5%YoY, compared to 4.7%YoY
in the corresponding period, a year ago.
12 Source: CSO, MOSPI , Phillip CapitalHigh Frequency Indicators: Auto sector still not out of the woods completely; but we may
have bottomed out
Monthly Passenger Vehicles Sales Growth (%, YoY) Monthly 2-Wheeler Sales Growth (%, YoY)
30 50
20 40
30
10
20
%, yoy
0
10
%, yoy
-10 0
-20 -10
-30 -20
-30
-40
Jul-16
Jul-17
Jul-18
Jul-19
Oct-16
Oct-17
Oct-18
Oct-19
Apr-16
Apr-17
Apr-18
Apr-19
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jul-16
Jul-17
Jul-18
Jul-19
Apr-16
Apr-17
Apr-18
Apr-19
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Oct-16
Oct-17
Oct-18
Oct-19
2-Wheeler sales: Domestic
PV: Domestic sales
Monthly Commercial Vehicles Sales Growth (% YoY) Monthly 3-Wheeler Sales Growth (% YoY)
120
110
130 100
90
80
80 70
%, yoy
%, yoy
60
50
30 40
30
20
-20 10
0
-10
-70 -20
-30
Jul-16
Oct-16
Jul-17
Oct-17
Jul-18
Oct-18
Jul-19
Oct-19
Apr-16
Apr-17
Apr-18
Apr-19
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
-40
Jul-16
Oct-16
Jul-17
Oct-17
Jul-18
Oct-18
Jul-19
Oct-19
Apr-16
Apr-17
Apr-18
Apr-19
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
LCV MHCV
13 Source: SIAM, Spark Capital. LCV – Light Commercial Vehicle, MHCV = Medium & Heavy Commercial VehicleHigh Frequency Indicators: Credit growth slows down considerably; deposit growth outpaces
credit growth. Cement, Steel and Coal output gaining momentum.
Credit to Deposit Ratio decelerated as deposit
Credit & Deposit Growth (%YoY) growth outpaced credit growth
80
16.0
14.0 78
12.0
76
10.0
74
8.0
6.0 72
4.0
70
2.0
0.0 68
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jul-17
Jul-18
Jul-19
May-17
Nov-17
May-18
Nov-18
May-19
Nov-19
Jan-17
Mar-17
Sep-17
Jan-18
Mar-18
Sep-18
Jan-19
Mar-19
Sep-19
Jan-20
Credit Deposit Ratio (%)
Monthly Steel & Cement Output (%YoY) Monthly Coal & Refinery products Output (%YoY)
28 20
23 15
18 10
13 5
%, yoy
-4.9
%, yoy
8 0 6.6
3 -5
-2 -10
-7 -15
-12 -20
-17 -25
Apr-18
Jun-18
Apr-19
Jun-19
Dec-17
Feb-18
Aug-18
Dec-18
Feb-19
Aug-19
Dec-19
Oct-18
Oct-19
Steel Cement
Coal Refinery Products
14 Source: Spark CapitalIndia has delivered moderate returns over the past year, while it has outperformed over the
long term (10 years)
• Over the past year
Developed markets outperformed emerging
markets.
EMs like Taiwan, Russia & Brazil and developed
markets like US & Australia were the top
performers.
India delivered moderate returns but
outperformed most of its Asian peers.
A number of other Asian markets
underperformed over the past year.
• Over the long term (10 years) Indian market has
outperformed, and been among the top performing
markets.
15Domestically, it has been a narrow market over the past year. Realty, consumer durables & banking
were the top sectors; large-caps outperform the broader markets
• It continues to be a narrow market over the past year, with bulk of the Nifty returns
being contributed by a handful of quality stocks.
Top 5 positive contributing stocks in Nifty index were all financials, and
contributed +780 points.
Meanwhile the balance 45 stocks of Nifty index contributed (-)371 points.
• Markets delivered moderate returns over the past year. Mid/small-caps underperformed large-caps over the past year, and also 2 years (especially).
• The top performing sectors over the past year were consumer durables, realty & banking.
• The bottom performing sectors over the past year were metal, auto, PSU and capital goods
16The govt. had announced a slew of measures to help and revive economic growth &
improve investor sentiment
Large fiscal stimulus by slashing corporate tax rates
Higher surcharge on capital gains tax (announced in the 2019 Union Budget) rolled back for FPIs and domestic HNIs
PSU bank recapitalization of Rs. 70,000 crore would be released upfront—helping to improve liquidity
Mega merger of 10 PSU banks into 4 large banks
Measures for auto sector:
- Additional 15% depreciation to be allowed on all vehicles purchased by March 2020 (to esp. benefit CV sector)
- Govt. also postponed increase in registration fee charges for vehicles to June 2020
For realty sector, govt to set up a Rs. 25,000 crore AIF to revive stalled housing projects
Govt’s push towards strategic divestment of PSUs, with a large divestment mobilization target budgeted for FY21
Govt releases National Infrastructure Pipeline of ~Rs. 1 lakh crore over 5 year period (FY20-25). We expect a gradual
recovery in capex cycle (as the economy starts to recover).
17India’s Ease of Doing Business rankings have significantly improved under the present govt.
• India’s ranking in the World Bank “Ease of Doing Business report 2020” improved further to 63rd position (out of 190 countries) from 77th
position in the previous year.
• The improvement in ranking was helped due to categories like resolving insolvency / bankruptcy, construction permits and trading across
borders.
• India’s rankings have improved the most (by 79 places) from 124th rank in 2014, under the present government
18Indian market trading near longer term average valuation
Nifty 12-month Forward PE (X)
• Even though forward P/E valuations are reasonable (due to expected corporate earnings recovery in FY21),
trailing P/E for Nifty is at slightly elevated levels.
• Valuations are particularly rich for some quality stocks—which have seen significant outperformance.
19 Source: Bloomberg, Motilal OswalCorporate earnings for Q3 FY20 have been tepid, but expected to recover--with Nifty EPS
growth projected to rise from 12% in FY20 to 19% in FY21
Nifty Earnings Per Share (EPS) Trend
Source: Bloomberg, Bajaj Allianz Research
20FII equity flows have been significantly higher this fiscal year
• FPI equity flows picked up strongly, on the back of some return in global risk. India registered one of the highest FPI flows among
peer EM Asian markets. However, in the month of Feb 2020, FPIs registered outflows due to global risk aversion.
• DII equity flows had slowed down in recent months (due to lumpsum outflows from equity mutual funds, although SIP inflows
remained stable). However, in the month of Feb 2020, DIIs registered a healthy net inflow.
• For FYTD 20 both FPI and DII (esp. MF) cumulative equity flows now stand somewhat similar, unlike the previous fiscal year.
21Bond yields have softened over the past year
India 10 Yr G-Sec Yield Vs Repo Rate (%)
Source: Bloomberg
• Bond yields have fallen over the past year on RBI rate cuts, global monetary easing and fall in bond yields, fall in crude prices, improving liquidity, and RBI’s
“Operation Twist”.
• The RBI has cut policy rate (repo rate) 5 times since Feb 2019, by a cumulative 135 bps, and also changed the policy stance to “accommodative”. In the Feb
2020 policy review, RBI maintained status quo on rates but incentivized credit to certain stressed sectors & also tweaked the liquidity framework to aid in
greater monetary transmission.
• CPI inflation projection was revised upwards to 6.5% for Q4 FY20, 5.4-5.0% for H1 FY21 (vs 4.0-3.8% earlier), but expected to fall sharply to 3.2% in Q3 FY21.
• RBI recognized that there is monetary policy space for future action, but it will be data–dependent. RBI also said that it is ready to take action to maintain
financial stability.
22Market Outlook & Strategy
• Some global risk aversion & correction in global markets being seen. Central banks have started to
Global Risk aversion due react with the US Fed going in for an emergency 50 bps cut; other central banks also follow.
to Coronavirus epidemic • We may see some market volatility in the short term if the epidemic escalates to other countries,
but value may start to emerge at some juncture—if a significant slowdown doesn’t pan out.
Valuations are reasonable • Barring a few “quality stocks”, where valuations are elevated, for the rest of the market valuations
except for “quality” are in line with the long term average.
• Corporate earnings to also gradually recover, and Nifty earnings growth projected to pick-up from
Corporate Earnings ~12% in FY20 to 19% in FY21. This will help to decide the market trajectory.
Equity Investment • Investors should continue to invest systematically into equities.
• We continue to prefer large-caps, but also see some bottom-up opportunities in the mid-cap
Strategy segment—from a valuation perspective.
• The market borrowing & fiscal deficit was along expected lines. This, along-with some positive
measures for bond markets, Feb 2020 RBI policy, fall in global bond yields & crude prices have
Debt Markets & Strategy helped yields to soften. RBI also indicated its ready to take action to maintain financial stability.
• We currently prefer the medium term part of the yield curve.
• Eye needs to be kept on the impact of Novel Coronavirus outbreak, global monetary policy stance,
Factors to watch out for global growth trajectory, geo-political events, progress on US-China trade resolution and global risk
appetite.
23Some Key Lessons in Investing 24
Different Asset Classes Outperform / Underperform in Different Years: Asset allocation
may help in times of volatility
Mid-cap equity and large-cap equity was the top performing asset class in CY 2007, but then became the bottom performing asset class (falling sharply)
during the market downturn of 2008. Similarly equities did well in 2012, 2014 and 2017, but was the bottom performing asset class in 2011, 2016, and 2018.
Gold as an asset class outperformed during the financial crisis (in the years of 2008 to 2011), but was among the bottom performing asset class in 2013-
2015. In 2019 gold was the top performing asset class.
Debt outperformed in 2015 and 2016, but was an underperformer in 2017, as bond yields hardened during the year. However, debt did well in 2019 as bond
yields fell during the year.
25 Past performance is not an indicator of future performancePerformance of different asset classes in India– Equities have outperformed over the long
term Real estate price trends – City-wise
Past performance is not an indicator of future performance Source: Phillip Capital
• Equities has been one of the top performing asset classes over the long term, even though it comes with intermittent volatility / corrections.
• Real estate has been among the bottom performing asset classes over the past 5 years. City-wise data shows that real estate prices rose strongly
between 2009-2013, but post that have been flattish to negative.
26Invest systematically in equities, as market timing is difficult. Patience is the key.
• Assuming an investor started an SIP in Bajaj Allianz Equity
Growth Fund (of Rs. 50,000 per year) at the previous
market cycle peak of 2007 end.
• If the investor would have continued with the SIP (and
not got deterred by volatility / market corrections) then
the cumulative investment of Rs. 6.5 lakhs would be
worth:
Rs. 13.04 lakhs (10.7% XIRR) in Bajaj Allianz Equity
Growth Fund
Rs. 11.42 lakhs (8.7% XIRR) in benchmark Nifty 50 index
Source: Bloomberg, Bajaj Allianz Insurance Analysis. Data as of 28 Feb 2020. Past performance may not be indicator of future returns.
27Longer the holding period – lower the risk of investing in equities, generally
Source: Bloomberg, Bajaj Allianz Life Insurance Analysis. Past performance is not indicative of future returns. Returns greater than 1 year is CAGR.
• Equities help beat inflation and meet longer term goals.
• Individual stocks are risky, but as a portfolio of stocks, risk gets minimized—due to diversification. Risk and chances of delivering negative returns further gets
reduced by investing in regular intervals over a longer time period.
• For 5 year period, 88% of cases were positive return years. For 10 year period, almost all years (except 1) delivered positive returns. Above 10 year period,
there have been no cases of negative returns.
• Also the volatility (range of returns) reduces for longer holding periods.
Warren Buffet – "The stock market is a device for transferring money from the impatient to the patient”.
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